Latest FED Statement More of the Same: Don’t Panic, Everything’s Fine

Janet Yellen, Chairwoman of the Federal Reserve appeared before Congress today to speak about the current state of the economy and the potential for raising interest rates later this year. She was also grilled by several Republican Committee Members over the Fed’s recent leaks, lack of transparency, and unwillingness to cooperate with an ongoing investigation. She said that the Fed wanted to cooperate, but was unable to hand over the requested documents for fear that it could jeopardize a separate ongoing investigation by the Department of Justice.

Sean Duffy of Wisconsin got into a heated exchange with Yellen and admonished her for the Fed’s lack of transparency: “Madame chair, it appears that you are the one who is jeopardizing, or the Fed is the one who is jeopardizing, this investigation.”

Yellen continued to parrot her remarks from July 10th by saying that the economic outlook in the U.S. was optimistic and that they still expect to raise rates later this year, which she again stressed would be gradual. She also briefly touched on the potential risks from Greece and China while further detaching herself from reality: “economic growth abroad could also pick up more quickly than observers generally anticipate, providing additional support for U.S. economic activity.”

She was doing her job which is saying whatever she can to keep everyone from panicking.

If the Fed does in fact raise rates this year — and many economists think they won’t — it will effectively “pump the brakes” on the economy while unwinding the liquidity of the past few years of Quantitative Easing and Zero Percent Interest Rates. A near-term rate hike should also be good for gold.

However, if the Fed continues to delay a rate hike and pushes it to 2016 or later, it will further inflate the stock market and increase the false sense of prosperity among investors. That will make it more painful in the end for markets and require an even bigger correction. A delayed hike will temporarily suppress gold but should create an even bigger breakout once the market begins to reflect reality.

Either way, any rate hike, whether it comes in September or next year will be painful for the economy and slow down growth and should be bullish for gold.